Billionaire investor Bill Ackman has slammed the Fed’s 2% inflation target as “no longer credible”.
The Federal Reserve has two simple but extremely difficult tasks: ensure maximum employment and maintain price stability.
To say that the second part of this equation – price stability – has been a challenge this year is an understatement.
Fed officials are targeting a 2% annual inflation rate as measured by the Personal Consumption Expenditure (PCE) Price Index. But this year central bankers are far from their target as inflation has reached levels not seen in four decades. To combat these historic consumer price hikes, the Fed raised interest rates seven times in 2022.
But now Bill Ackman, the billionaire founder of Pershing Square Capital, argues that the central bank underestimates inflation’s staying power and how much pain it must inflict to tame it.
“I do not think so [Federal Reserve] can bring inflation back to 2% without a deep, job-killing recession,” he wrote on Twitter thread. “Even if it goes back to 2%, it will not remain stable there permanently.”
Ackman, who has made a name for himself as an activist investor and has taken on the likes of hedge fund titan Carl Icahn, believes accepting inflation around 3% is “a better strategy” than the economy accommodating with interest rate hikes destroy to try this get to 2%.
The world is entering a new era, he argues, in which higher inflation will become the norm.
“That [Federal Reserve’s] The 2% inflation target is no longer credible,” Ackman said wrote. “Deglobalization, the transition to alternative energy, the need to pay workers better, lower-risk, shorter supply chains are inflationary. The Fed cannot change its target now, but likely will in the future.”
Still, most economists scoff at the idea of changing the Fed’s inflation target. And Chairman Powell was very clear at Wednesday’s Federal Open Market Committee (FOMC) press conference when asked about the target of 2% inflation.
“Changing our inflation target is something we are not thinking about. And we won’t think about that,” he said. “We will use our tools to get back to 2%. I don’t think this is the right time to think about it.”
However, Powell added that exploring the possibility of a higher target rate could eventually be a “longer-term project.”
In June, Ackman sang a different tune when discussing the Fed’s inflation battle, urging central bank officials to “get aggressive” on rate hikes. But last month he appeared to have had a change of heart, arguing that on a conference call with investors we would “ultimately have to accept higher levels of inflation.”
The 2% Debate
Ackman isn’t the only billionaire investor questioning the Fed’s 2% inflation target this year, either.
Barry Sternlicht, founder, chairman and CEO of private investment firm Starwood Capital Group, previously said wealth that the Fed is destroying the economy by trying to hit the “arbitrary” 2% inflation target.
Sternlicht believes that as long as inflation is kept in check — and fueled by wage growth and rising consumption — it’s not necessarily a bad thing.
“Could it be 3% or 4%? That would be fine,” he said. “Growth and inflation led by wage increases are actually leading to a bigger economy, a bigger pie for everyone.”
Claudia Sahm, the founder of Sahm Consulting and former Federal Reserve economist, shared wealth back in October that she believes the Fed should stick to its 2% target, otherwise it could lead to investors questioning its credibility.
“The Fed is not going to give up its 2 percent target and I think that’s reasonable,” she said. “They accepted that as a goal and said that was a ‘job well done,’ so I think it would be disruptive for them to say, ‘Oh, actually we’re going to redefine a job well done.'”
Sahm argues that the Fed should instead be prepared to let inflation run slightly above its 2% target as long as it’s trending in the right direction.
“There’s nothing in the strategic plan for the Fed that says they have to get to 2% next year or two years,” she said.
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